UK economy contracts in Q4 after snowy Dec

London: Britain’s economy suffered a shock 0.5% contraction in the last three months of 2010 after December’s heavy snow took a far harsher toll than economists had forecast, official data showed on Tuesday.

The figures will be bad news for the government which is due to start cutting public spending in earnest early in 2011, and will cast doubt on market expectations that the Bank of England will raise interest rates in the first half of the year.

The Office for National Statistics said that Britain’s economy would have struggled to register any growth in the fourth quarter even without any snow disruption.

Economists had only expected growth to slow to 0.5% after 0.7% growth in the third quarter, though uncertainty over the impact of December’s snow disruption meant the range of forecasts was wide, ranging from 0.1% to 0.6%.

The figures highlight the dilemma facing the Bank of England which needs to steer inflation back to target but is reluctant to raise interest rates when a sustained recovery is far from assured.

Growth is expected to slow even further in the first half of 2011 when a rise in VAT sales tax and an intensification of the government’s spending squeeze add to the headwinds.

Separate ONS figures showed that Britain’s public-sector net borrowing rose from a year ago to its highest December reading on record, though it fell from the all-time record re ached in November.

Public sector net borrowing came in at £15.3 billion in December, below the £18.1 billion forecast but above December 2009’s total of £14.3 billion.

The government’s preferred measure of borrowing, which excludes financial sector interventions, came in at £16.8 billion, down from £21.0 billion a year earlier.

For the year to date, this came to £118.4 billion, and the Office for Budget Responsibility forecasts it will hit £148.5 billion this fiscal year.